When looking to invest there are many considerations that need to be taken in to account.
These include, when will the money need to be accessed, will it be needed within the next few years or is it likely to remain invested over the longer term? What is the tax position of the client both now and what is it likely to be when the money is required? What allowances does the client have available? Plus many more!
When looking to invest, irrespective of the type of product being used and whether it is a regular contribution or lump sum there is one constant that needs to be addressed – attitude to risk and the ability of the client to be able to cope with any financial losses.
When assessing attitude to risk I generally start by asking the client how they would describe their attitude when making decisions. Having heard a variety of answers to this question, the most common is ‘middle of the road’ or ‘not too risky or not too cautious’.
When looking at an individual’s ability to cope with any sudden financial losses, there are two main aspects to consider. One being, can they cope financially if the value of their investment was to fall? If a sudden loss in value impacts upon the standard of living this will need to be taken in to account and possibly a lower risk profile selected.
The other aspect is the individual’s emotional ability to cope with the potential volatility of their investment. Someone could have a substantial amount of wealth but if they are lying awake worried about the performance of the markets this could mean they are not able to cope emotionally with a high level of risk.
In order to assess attitude to risk we ask the client to complete a risk questionnaire, the outcome from which provides a useful starting point for further discussion. In addition, we have estimates of the various returns (both good and bad) for all risk profiles and investment terms. This provides the client with an understanding of the potential volatility and estimates of any potential downside. Gathering all this information together we then provide the advice.
Taking the time to understand an individual’s approach to risk and feelings around the ups and downs of investing helps us to ensure they are invested appropriately. Whilst this may not guarantee a good nights sleep, investing in the right risk profile means the level of expectation of the highs (and lows) is understood by the client.